High Wire Networks Inc (HWNI)

[nordicroots]

There are many court cases that set precedents addressing the issue of fiduciary duties owed to the minority shareholders. Some of the case law can be complex and others may be simple and straightforward. The cases listed below actually describe situations where the minority shareholders were underpaid for their shares (but of course this says nothing about the notion of officers/directors granting themselves free shares to become majority shareholders in a way that usurps complete voting control and actually takes majority ownership of a company from the other shareholders).

"Majority shareholders and corporate insiders commit fraud by deception when they purchase minority shares in violation of duties of full disclosure and fairness. "

Some interesting reading[just my opinion] if you have time:

http://www.shareholderoppression.com/fraud-by-deception

Directors' and Officers' Fraud by Deception
In Westwood v. Continental Can Co., the Fifth Circuit decided a case involving a shareholder and managing director of a Texas corporation who negotiated a deal sell the stock of his corporation, and then negotiated option agreements with all the stockholders that would permit him to buy their stock and resell it at a premium. Ultimately, the buyer refused to consummate the transaction, and the shareholder sued for breach of contract. The buyer successfully defended the action on the grounds that the contract was unenforceable because it constituted a breach of the shareholder’s fiduciary duties to the corporation and its shareholders.

The Fifth Circuit held that the contract was unenforceable because “when directors or other officers step aside from the duty of managing the corporate business under the charter for the benefit of stockholders, and enter upon schemes among themselves or with others to dispose of the corporate business and to reap a personal profit at the expense of the stockholders by buying up their shares without full disclosure and at an inadequate price, there is a breach of duty.” “If a favorable opportunity arises to sell out, the stockholders and not the managing officers are entitled to have the benefit of it. If an agreement cannot be reached by the stockholders, no doubt one faction may buy out the other.” Any shareholder, even though an officer and director, could legally buy up the stock of the other shareholders with the purpose of reselling at a profit, but only on full disclosure. The shareholder had disclosed to the other shareholders in a letter “the state of the business, the want of harmony among the stockholders, and the wisdom of acting promptly to save the investment.”

In making his offer for the stock, he stated that he proposed to resell it as an entirety, and if unable to do so, to dissolve the corporation and dispose of the assets, hoping to make a profit as the reward of his risk and efforts.” He had even disclosed that he was in the process of carrying on negotiations for a possible sale. However, in the lawsuit, the shareholder contended that he in fact had a contract with the buyer; and the court held that, if so, “the plan as a whole was thus one for the managing officer to deceive the stockholders and acquire the corporate assets for his own and another's profit.”

Both Miller and Westwood involved shareholders who were also officers and directors, and both opinions emphasize their duties as officer and directors. Neither case was a derivative action—in Miller, the plaintiff was suing individually, and in Westwood the corporation was not involved in the transaction. The duties of disclosure in these cases are best understood as flowing from the corporation’s duties to its shareholders, with the courts imposing those same duties on the defendants because of their control of the corporation. If a corporation could not enter into a transaction or purchase shares from a shareholder because the corporation was in possession of undisclosed, material information, then a shareholder, officer or director who is in the same position of advantage over the shareholder as a result of his control over a corporation is subjected to the same duties of disclosure.

Majority Shareholder Fraud by Deception
Allen v. Devon Energy Holdings, L.L.C. concerned the redemption of Allen’s minority interest in an LLC involved in natural gas exploration and development. The LLC redeemed Allen’s interest in 2004 based on a 2003 $138.5 million appraisal of the LLC. In 2004, however, the LLC sold for $2.6 billion—almost twenty times the value used to calculate the redemption price. Allen sued, claiming that the majority shareholder and the LLC made misrepresentations, failed to disclose facts regarding the LLC’s future prospects, and that Allen would not have sold his interest in 2004 if he had known these material facts. For instance, the majority shareholder withheld information concerning the LLC’s technological advances in horizontal drilling and significant lease acquisitions in an existing natural gas field, both of which occurred after the redemption offer but before the redemption.

Although the transaction was a redemption in which the company was the purchaser, the court of appeals treated the transaction as though it were a purchase by the majority shareholder. “We note that the duty we recognize is owed by Rees-Jones, a majority owner and manager with virtually unmitigated control over an LLC, not [the LLC] itself—whether [the company] owed Allen any fiduciary duties is not before this Court.” The appellate court determined that a majority shareholder owed a fiduciary duty to a minority shareholder in the context of a redemption agreement. The court based its decision on majority shareholder’s operating control over the affairs of the company and intimate knowledge of the company’s daily affairs and future plans. Further, the purchase of a minority owner’s interest benefitted the majority owner.

Ritchie v. Rupe’s treatment of this line of authority is significant. The majority opinion cited Allen as authority for the ability of individual shareholders to sue directors and majority shareholders for “fraudulently [] manipulat[ing] the shares’ value” under existing causes of action. In re Fawcett, Miller, and Allen all clearly recognize that corporations—and by extension officers, directors, and controlling shareholders—owe fiduciary duties to minority shareholders at least in the context of a transaction to purchase the minority’s shares when there is knowledge of material facts within the corporation not disclosed to the shareholder. These duties are completely consistent with the legal relationship and duties described in Yeaman v. Galveston City Co.; they are completely inconsistent with notion that no common-law duties are owed directly to minority shareholders. However, Ritchie’s citation of Allen as “addressing fraud claims relating to closely held company’s purchase of minority shareholder interests” —a fraud by deception claim that existed only because of the fiduciary duty to make full disclosure—is at least an implicit acknowledgment of the existence of some duties owed to minority shareholders.